BATS' Latest Issue Bad for Electronic Trading

Stock exchange BATS (the third largest stock exchange) reported that they overcharged members $420,000 from 2008 to 2012 for certain orders. BATS allowed some short-sale trades that in some cases were not executed at the best available price, as required by securities laws.

First, kudos to BATS for detecting the problem and promptly reporting it. Now the downside: this is not a confidence-builder for electronic trading.

Without getting too wonky, BATS allowed some short-sale trades that in some cases were not executed at the best available price, as required by securities laws.

First, kudos to BATS for detecting the problem and promptly reporting it after it was discovered last week.

Now the downside: this is not a confidence-builder for electronic trading.

Here's my question: how come no one discovered this before? How come BATS didn't see this in testing, and didn't notice it for four years?

I spoke with Joe Ratterman, who runs BATS, and asked him. He said that they are constantly testing their systems, but in practice this type of thing is very difficult to detect.

First, the time involved when the condition existed is vanishingly small--microsends (millionths of a second).

Second, he said the amount of orders that were not executed properly was small. Very small. BATS executed 10.6 billion orders in those 4 years, and of that a little over 436,000 were not executed right--about .004 percent.

It's not just that BATS didn't notice this--no one else did either. How come some high-frequency shop didn't notice it? Or did they know about it and didn't say anything because it might have advantaged them? He declined to comment on that.

What this tells you is that the execution side of this business is incredibly complex. Who knows what other glitches--large or small--are floating out there?

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